Session 3 presentation from the 3rd Strategic Dialogue of the Carbon Market, 21-22 September 2018

1. Canada intergovernmental working group
on carbon pricing and competitiveness
Éric Théroux, Québec
Tim Lesiuk, British Columbia
September 21, 2018

2. The Pan-Canadian Framework on Clean
Growth and Climate Change
In 2016, First Ministers agreed to work together to
develop a pan-Canadian framework on clean
growth and climate change that will :
• be built on measures that the provinces and territories
have taken (flexibility and recognition)
• be supported by broad engagement with indigenous
peoples and Canadians
• be informed by science and evidence
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3. The Pan-Canadian Framework on Clean
Growth and Climate Change
• In the Framework, the federal, provincial and
territorial governments committed to reviewing
the overall approach to pricing carbon
pollution across Canada by early 2022 to
confirm the path forward
• An interim report will also be completed in 2020
• As an early deliverable, the review is assessing
approaches and best practices to address the
competitiveness of emissions-intensive, trade-
exposed (EITE) sectors in Canada
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4. The EITE Review is focused on:
• Identifying metrics to track competitiveness
impacts over time
• Identifying the potential competitiveness and
leakage risks in Canada
• Quantifying the degree of those risks
• Reviewing best practices and lessons learned
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5. Measuring competitiveness and leakage risk
Comparing carbon pricing across jurisdictions
• Short and longer-term competitiveness issues [Operation
and Investment]
• Implicit and explicit carbon prices
• Emission-intensive/trade-exposure metrics
Modelling carbon leakage in quantitative terms is difficult
Metrics will always be challenged by the
measurement/methodology used
• lack of available and good data (confidential business
information)
• many other variables are at play in corporate decision-
making (carbon pricing tends to be very low compared to
other costs)
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6. Carbon price differentials
• In the absence of comparable carbon pricing
[average, marginal, implicit, explicit] across
jurisdictions, competitiveness issues may arise if
the carbon cost in one jurisdiction is significantly
higher
• Convergence of carbon pricing policies
between competing jurisdictions reduces the
potential for carbon leakage
• If carbon policies are fully harmonized, carbon
leakage is no longer an issue
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7. Sector/product benchmarks (standards
or free allocation)
• Benchmarks need to provide the right incentives to
reduce greenhouse gas emissions
• Use effective approaches from existing schemes
[don’t rebuild the wheel], and benchmark principles
could help bridge programs
• Even though setting benchmarks can be complex
and costly, they should be updated regularly
• The carbon pricing mechanism should not distort the
firm’s decision making, but support investment
decisions that accounts for (internalize) the
environmental impact of industrial facilities/processes
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8. Competitiveness Incentives
• Most of the research on mitigating competitiveness
impacts on vulnerable sectors has focused on
output-based subsidies (emission allowance
allocation)
• There was very little discussion on alternative
mechanisms such as carbon border adjustments,
border tax adjustments, or targeted use of carbon
revenue
• Can also use complementary policies [external to
carbon pricing framework such as tax incentives] to
support industries where abatement potential is
limited
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9. Few evidence of carbon leakage
Studies repeatedly find that there are few/no clear examples of
carbon leakage. Reasons include:
• Government mitigation programs and strategies have
been successful
• Carbon prices have been too low compared to other
production costs to cause measurable examples of
leakage
• Governments have signaled the intent to raise carbon
prices with sufficient lead time so that private companies
can take the appropriate actions to adapt
• Hard to detect many types of leakage, including lost
investment
• Firms can innovate and implement technology that can
offset regulatory costs
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10. Few evidence of carbon leakage
Carbon pricing and/or regulations tend to be a small
factor at play when observing production/trade
changes compared to:
• Energy costs
• Transport costs
• Proximity to demand
• Labour considerations (costs, skills, etc.)
• Availability of raw materials
• Sunk capital costs
• Agglomeration
• etc.
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11. Thank you !
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